Default could send rates through the roof

by MPA16 Oct 2013

If Congress doesn’t agree on a deal to raise the debt ceiling, mortgage rates could skyrocket, according to a MarketWatch report.

If the government defaults on its debt, borrowers could see rates go up by one or even two percentage points within a day or so, SMR Research President Stu Feldstein told MarketWatch. “Interest rates would go through the roof immediately,” Feldstein said.

Mortgage rates would increase because a default would lead to an increase in Treasury yields, to which many mortgage rates are tied. Shorter-term Treasurys would feel the hit first, which would increase rates on adjustable-rate mortgages, according to MarketWatch. Long-term fixed rate mortgages, often tied to 10-year Treasury yields, would take the longest to feel the impact – but a default could lead to 30-year FRMs with an average rate of 5.5%, Moody’s Chief Economist John Lonski told MarketWatch.

The fiscal standoff in Washington has already hit the mortgage industry. Although the Federal Housing Administration is still accepting new loans, the government shutdown has resulted in a reduced staff and slowdowns in processing. The Department of Agriculture, meanwhile, has gone almost entirely dark during the shutdown, with USDA loan processing completely suspended.


Should CFPB have more supervision over credit agencies?